European implications of the Rüffert case judgment preliminary analysis and possible courses of action

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1 European implications of the Rüffert case judgment preliminary analysis and possible courses of action On 3 April 2008, the European Court of Justice (ECJ) gave its judgment in Case C- 346/06 Rüffert. The object of the present document is to summarize the findings of the Court, to draw some preliminary conclusions of the judgment, and to discuss possible courses of action. Facts of the Case According to the Law of Land Niedersachsen on the award of public contracts, public works contracts may be awarded only to undertakings which undertake in writing to pay their employees at least the remuneration prescribed by the applicable collective agreement. The contractor must also undertake to impose that obligation on subcontractors and to monitor their compliance with it. Non-compliance with that undertaking triggers the payment of a contractual penalty. The company Objekt und Bauregie undertook to pay employees employed on the Göttingen-Rosdorf prison building site the wages laid down in the applicable Buildings and public works collective agreement. Objekt und Bauregie used as a subcontractor an undertaking established in Poland. The subcontractor payed its 53 workers engaged on the building site only 46.57% of the prescribed minimum wage. The works contract was terminated following a criminal investigation. Proceedings commenced between Land Niedersachsen and Dirk Rüffert, the liquidator of the assets of Objekt und Bauregie, in order to determine whether Objekt und Bauregie was required to pay a contractual penalty amounting to EUR (1% of the amount of the contract) for breach of its undertaking concerning rates of pay. The case was appealed to the Oberlandesgericht Celle, which asked the Court of Justice to decide whether the freedom to provide services precludes a statutory obligation requiring a contractor in a public works contract to undertake to pay its employees at least the remuneration prescribed by the applicable collective agreement. The Judgment of the Court In its judgment, the ECJ determined whether the rate of pay at issue was fixed in accordance with one of the procedures provided for in the Posting of Workers Directive 96/71/EC. First, the Court found that a legislative measure such as the Landesvergabegesetz, which does not itself fix any minimum rates of pay, cannot be considered to be a law, within the meaning Article 3(1) of Directive 96/71, which fixed a minimum rate of pay.

2 Second, it was also clear to the Court that the Buildings and public works collective agreement at issue, was not a collective agreement which has been declared universally applicable within the meaning of the German law transposing Directive 96/71. Third, the Court found it to follow from the actual wording of second subparagraph of Article 3(8) of Directive 96/71 that this provision is applicable only where there is no system for declaring collective agreements to be of universal application, which is not the case in the Federal Republic of Germany. It followed that the German legislative measure did not fix a rate of pay according to one of the procedures laid down in the first and second indents of the first subparagraph.article 3(1) and in the second subparagraph of Article 3(8) of Directive 96/71. Therefore, according to the ECJ, such a rate of pay cannot be considered to constitute a minimum rate of pay within the meaning of Article 3(1)(c) of Directive 96/71, which Member States are entitled to impose, pursuant to that directive, on undertakings established in other Member States, in the framework of the transnational provision of service. Relying on its judgment in Case C 341/05 Laval un Partneri, the ECJ also ruled that such a rate of pay cannot be considered to be a term and condition of employment which is more favourable to workers within the meaning of Article 3(7) of Directive 96/71. Therefore, the level of protection which must be guaranteed to workers posted to the territory of the host Member State is limited, in principle, to that provided for in Article 3(1), first subparagraph, (a) to (g), of Directive 96/71. A Member State is therefore not entitled to impose, pursuant to Directive 96/71, on undertakings established in other Member States, a rate of pay such as that provided for by the Buildings and public works collective agreement. According to the Court, that interpretation of Directive 96/71 is confirmed by reading it in the light of Article 49 EC, since that directive seeks in particular to bring about the freedom to provide services. More specifically, the ECJ considered that the restriction on the freedom to provide services resulting from the obligation to pay employees the remuneration laid down by the applicable collective agreement was not justified by the objective of ensuring the protection of workers. According to the Court, it had not been established that the protection resulting from such a rate of pay which exceeds the minimum rate of pay applicable pursuant to the German law on posting of workers is necessary for a construction sector worker only when he is employed in the context of a public works contract and not when he is employed in the context of a private contract.

3 Moreover, the Court rejected the assertion put forward by the German government that the restriction could be considered to be justified by the objective of ensuring protection for independence in the organisation of working life by trade unions. Analysis The very purpose of the Posting of Workers Directive has been narrowed down to bring about the freedom to provide services. In the Rüffert Case, the ECJ confirms, and to some extent even further narrows down its already restrictive interpretation of the Posting of Workers Directive in the Laval Case. The fifth recital of the Directive states one of the purposes as promoting a climate of fair competition and measures guaranteeing respect for the rights of workers. In Rüffert, however, the Court only insists, in paragraph 36 of the judgment, on the fact that the directive seeks in particular to bring about the freedom to provide services, which is one of the fundamental freedoms guaranteed by the Treaty. It is therefore questionable if it can be maintained that the Directive pursues a twofold aim of providing minimum protection for posted workers and equal treatment as between service providers and domestic undertakings in similar circumstances. Those two requirements must be pursued concurrently. as Advocate General Mengozzi contended in paragraph 171 of his opinion in Laval. The margin of appreciation of the Member States has been further narrowed down The Court noted, in paragraph 68 of the Laval judgment, that Member States are free to choose a system at the national level, which is not expressly mentioned among those provided for in the directive. In the Rüffert Case, the Court seems to have further narrowed down the margin of appreciation of the Member States, by adopting a strictly formalistic approach and limiting its examination to whether the rate of pay at issue was fixed in accordance with one of the procedures provided for in the Posting of Workers Directive (paragraphs of the judgment). Contrary to its Advocate General, the Court held that the second subparagraph of Article 3(8) of Directive 96/71 is applicable only where there is no system for declaring collective agreements to be of universal application, which is not the case in the Federal Republic of Germany. The Court confirms that the Posting of Workers Directive imposes a ceiling as regards the conditions, which can be imposed on a service provider from another Member State The Court also confirmed its surprising reading of Article 3(7) of the Posting of Workers Directive from the Laval Case, turning a minimum harmonization Directive into

4 maximum harmonization as regards the conditions, which can be imposed on a service provider from another Member State. In the 17th recital in the preamble to the directive provides that the mandatory rules for minimum protection in force in the host country must not prevent the application of terms and conditions of employment which are more favourable to workers. The first subparagraph of Article 3(7) of the directive translates this intention of the Community legislature by stating that [p]aragraphs 1 to 6 shall not prevent application of terms and conditions of employment which are more favourable to workers. According to Advocat General Yves Bot, Article 3(7) of Directive 96/71 permits the Member State where the services are performed to improve, for the matters referred to in Article 3(1) of the directive, the level of social protection which it wishes to guarantee to workers employed in its territory and which it can therefore apply to workers posted there. Hence, in principle, this provision authorises the implementation of enhanced national protection. Advocate General Mengozzi held the same view in the Laval Case. In paragraphs 197 and 198 of his opinion, he insisted that under Article 3(7) of Directive 96/71, paragraph 1 of that article is not to prevent application of terms and conditions of employment that are more favourable to workers. That latitude implies that Directive 96/71 does not prevent a rate of pay determined in accordance with a collective agreement concluded in the host Member State, which applies in practice to domestic undertakings in the sector concerned, from being extended, through recourse to collective action, to service providers from another Member State which, having posted workers to the territory of the first Member State, are operating in the same sector and are in similar circumstances. Relying on its judgment in Laval, the Court rejected the interpretation of Advocate Generals Mengozzi and Bot. It confirmed that Article 3(7) cannot be interpreted as allowing the host Member State to make the provision of services in its territory conditional on the observance of terms and conditions of employment which go beyond the mandatory rules for minimum protection. Such an interpretation would, according to the Court, amount to depriving the directive of its effectiveness, namely to bring about the freedom to provide services. The Court has limited the possibility, in the public procurement Directive, to impose social considerations as regards service providers from other Member States As Advocate General Bot pointed out in his Opinion, the possibility of integrating social requirements into public procurement contracts has already been recognised by the Court and is now enshrined in Directive 2004/18 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts. Article 26 of that directive, headed Conditions for performance of contracts, reads as follows: Contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with

5 Community law and are indicated in the contract notice or in the specifications. The conditions governing the performance of a contract may, in particular, concern social and environmental considerations. It follows from the ECJ s judgment in the Rüffert Case that such social considerations cannot any longer be upheld as regards service providers from other Member States, in so far as such social considerations include terms and conditions of employment which go beyond the mandatory rules for minimum protection. Possible courses of action It is evident from the Laval and Rüffert Cases that the ECJ has embarked on an interpretation of the Posting of Workers Directive to the sole benefit of the employers freedom to provide services. By finding that there is an obligation upon Member States and trade unions, in the name of transparency and forseeability, to provide for minimum levels of pay in legislation and/or in collective agreements, and at the same time preventing the host Member State and/or trade unions to require conditions of employment which go beyond those mandatory rules for minimum protection, the Court has opened up for the very competition on wages within the European Union, which the Community legislation had set out to eliminate or at least minimize. There has been a tendency, both from the European Commission, national governments and even some national trade unions, to try to limit the implications of the Laval and Rüffert judgments to, respectively, the Swedish and German social models. It should however at this stage be clear to everyone involved that these two judgments will have serious implications in all Member States, and in particular for the construction sector. At national level, one alternative is to try to limit the implications of the judgments by seeking to convince the legislator and the social partners to introduce and to raise minimum levels of pay in legislation and/or in collective agreements. The alternative to such national solutions is to try to achieve modifications in the current state of Community law, in order to overturn the Laval and Rüffert Cases. When considering such a strategy, it is important not to waste political capital on proposing general declarations and clauses which are not legally binding. And since it is questionable whether modifications of the Treaties would be a realistic option at this stage of the ratification of the Lisbon Treaty since several Member States already ratified the Treaty a more realistic strategy for change in the current state of Community law would be to convince the Community legislator and first and foremost the European Commission to propose amendments in the Posting of Workers Directive. Such a perspective is currently gaining political acceptance and momentum across the political isle. According to Joseph Daul, Chairman of the EPP-ED Group, and Elmar Brok MEP, in a press release of 4 April 2008, the ECJ interpreted the Posting of Workers

6 Directive in the Rüffert Case in such a way that the protection it provides against social dumping has to be seen as the final word and not as a form of minimum protection. They added that a free exchange of services between EU Member States must, however, take place on fair terms, ( ) and must not be allowed to lead to competition through ruinous low wages. If this is no longer ensured by existing Regulations (which prescribe minimum levels), ( ) then the Posting Directive has to be revised. A call for amendments in the Posting of Workers Directive should be coupled with political pressure on the Commission, the Member States in the Council and the European Parliament to adopt a Directive of the European Parliament and the Council on working conditions for temporary workers (see Commission proposal COM(2002) 149 final, currently being stuck in the legislative process and, in any case, having been watered down in the Council). Another option for EFBWW and its affiliates could be to combine such political demands with a coherent litigation strategy before national Courts, seeking to obtain the annulment of parts or the whole of the Posting of Workers Directive. Since the Posting of Workers Directive is to be interpreted as constituting a complete harmonisation of the conditions that can be imposed on service providers from other Member States, it could formally be argued, whenever the question of interpretation of the Directive arises in national proceedings, that the Posting of Workers Directive is invalid, at least in part. Indeed, it is highly questionable if the Community legislator, on the basis of Articles 47.2 and 55 in the EC Treaty, has the competence to legislate as regards wages, wage levels, or even an obligation to introduce minimum levels of pay in the Member States. According to the preparatory works to the Posting of Workers Directive, the Directive does not require the Member States to introduce rules concerning minimum wages or declare collective agreements universally applicable. This follows explicitly from the common declaration the Council and the Commission gave on the adoption of the Posting of Workers Directive. Since such legislative competence is also expressly excluded under Article EC and the Social Provisions of the EC Treaty, it would be surprising if the Community legislator instead had this legislative competence as regards the internal market. SH080412